Best method to adjust for assumable mortgage

[BJ]

I just did a quick google search and see 30 year fixed rates at 7.75%. I see a listing saying they have 2.75% assumable mortgage. Which has about 27 years and 8 months left. What's the best way to adjust for this?

 

[TerryRohrer]

Carefully! While you can calculate a theoretical incentive for a borrower to pay above market value for the below-market terms, that has to be tested against current sales at current rates to gauge the actual impact on a sale price. Of course, if it is your subject, it doesn't matter. In that case, appraise the subject, not the contract.

 

[Dublin ohio]

I just did a quick google search and see 30 year fixed rates at 7.75%. I see a listing saying they have 2.75% assumable mortgage. Which has about 27 years and 8 months left. What's the best way to adjust for this?

What type of mortgage is it. Conventional mortgages are generally not assumable. FHA loans are only assumable by another FHA applicant. VA loans can be assumed by non military. But it takes special approval and is not common.

 

[George Hatch]

Over at least the last 30 years, "assumable" has usually not meant "assumed". Which all by itself will generally mean that's not the most probable outcome. Unless/until it does become common.

Which is not outside the realm of possibilities in the current market.

The big question mark is what the market participants *believe* will happen with interest rates over the duration. If most people think the next 30 years will feature 6%-10% interest rates or even higher thats going to lead to one outcome, whereas a perception that the current rates are just a temporary spike and we'll be back to 3% rates by this time next year then that would have a very different outcome.

 

[Bobby Bucks]

Methinks that has to be an adjustable rate assumable loan with mucho lingo in the finer details that protects the lender, not the borrower.

 

[J Grant]

I just did a quick google search and see 30 year fixed rates at 7.75%. I see a listing saying they have 2.75% assumable mortgage. Which has about 27 years and 8 months left. What's the best way to adjust for this?

If it has not closed yet there is no way to tell

After a sale closes, the simple way and question at hand is, did the favorable assumable mortgage affect price. If it did, we can extract impact from the price itself when compared to sales which closed with conventional terms, and there is also a formula you can find that shows how the mortgage rate amortizes over months or years and use that -

A number of sales in my area are cash so they are less affected by interest rate changes.

 

[Long Walk]

@OP - I'm guessing this is a question about residential, but I might have missed that. In addition to the other good advice in this thread, I would offer the following:

Adjusting for any kind of non-standard financing starts with the confirmation interview. If the sale price was negotiated first and non-standard financing done later, then there is usually no effect on the sale price. Once the sale price is negotiated, it generally doesn't matter where the funds to close come from, unless the sale price was re-negotiated based on the financing.

Think of it this way: you as the buyer will negotiate the sale price based on how you expect to finance the purchase (all debt, all equity, or some combination). If the buyer expected to pay cash or obtain 3rd-party financing and negotiated the purchase price based on that, then the non-standard financing has no effect. Attempts to derive a financing adjustment using cash equivalency or paired sales are a paper exercise, in that example.

OTOH, if the buyer and seller started negotiating and one of them mentioned mortgage assumption or owner-financing, that may color the sale price negotiations. Seller may take a lower purchase price to get an income stream. Buyer may pay above market to avoid mortgage underwriting and the potential of a lower equity requirement in non-standard financing. Both may recognize they can't get the deal done any other way.

So, you have to be crystal clear with the parties what was done and how they negotiated. When I brokered residential, I did a good amount of owner-financing. Sometimes it affected the sale price. Sometimes it didn't. Usually, it was the only way to get a property sold.

 

[Elliott]

What is the balance on the mortgage. 28 years at $300,000 has payments of $1278. At 7.75% payments would be $2175, or $897 per month more. The PW of $897 for 28 years at a 5% discount rate is $162,713,

But I am skeptical the mortgage is really assumable.

 

[KHS445]

Tread very carefully, I saw and dealt with a lot of this in the late 70’s to mid 80’s, as a lender, when rates went from 8 1/2% to 16%+. My educated guess is neither the seller nor the real estate agent fully understands all of the details. The original mortgage is a legal contract between the lender and the original borrower. The original borrower was vetted by the lender and approved for the loan. The proposed buyer has not been vetted and has not been approved. While in most jurisdictions a due on sale clause has been deemed unenforceable, The Courts have ruled that the contract is between the lender and the original borrower and while the lender can not call the loan, the lender does not have to release the original borrower from the loan agreement, which is no different than what happens in a divorce situation. Therefore causing the assumed mortgage debt and the future payment history to show on the original borrower’s credit history, until the original debt has been paid in full. Not sure many sellers want to have their old mortgage and the buyer’s payment history to continue showing on their credit report for 27+ years.

imagine the issues that will be raised when the seller goes to finance anything in the future and the proposed lender says I am sorry but because of the open mortgage on your previous home your debt to income ratio or you payment history is keeping you from qualifying for this request. Also imagine the issues that will come up when the seller finds this out after closing. As the buyer I would say fine I will refinance the loan at the current rates and pay all the closing cost, but seller you will need to reimburse me my net difference in costs between the mortgage I assumed and the new mortgage for its entire life. And then what happens if the buyer is unable to refinance the debt.

As a buyer I would snatch this up and as the post closing seller,I would be suing the real eastate agent and their broker for all damages. I doubt the agent’s and broker’s E&O will cover their ignorance.

 

[Tom D]

assuming that you will rarely know of any comps that had the same assumable situation, then i would ignore it. in effect, isn't a seller's concessions a buydown by the owner? in all my long ago years of selling real estate i don't remember doing one, although it was mentioned when rates went from 8% to 11%. if you can't prove an adjustment, best to mention that there are no matched pair sales from the market to determine this affect, but you will consider it in you final value determination. you never get in trouble for verifiable adjustments, only when you make one and can't prove it to the state.